Dear reader,

Welcome to the November 2015 edition of The Director’s Dilemma.

Our case study for November looks at uninvited candidates for board seats and the issues to consider when maintaining or relinquishing control of board composition.

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Yale is chairman and also chair of the nominations and remuneration committee of his listed company board. The company has had a few set-backs and has recently underperformed the market after announcing lower than expected results. During a dip in the share price an active investor increased his holding to 17% and subsequently asked Yale to give him a seat on the board. This shareholder has often suggested that the company should change its strategy and CEO.

The board is confident that the strategy is the right one and that the setbacks were just the usual ‘slings and arrows’ of corporate fortune. The CEO has made promising progress on returning to planned performance and there are now signs that performance could be better than expected, allowing the company to more than recover from the setbacks. Other shareholders and the bank are supportive but this shareholder has now requisitioned a general meeting with the aim of voting two new directors onto the board. Both suggested directors are longstanding business associates of the investor.

The company constitution allows for two more directors than are currently on the board. Yale and his colleagues had assumed this gave them the possibility of managing succession with overlaps during board changes or quickly appointing expertise to the board should they wish to do so. The approved quantum for NED fees will also allow for two new directors without going back to shareholders for an increase. Yale can’t refuse to hold the meeting or to accept the new appointments if the shareholders vote for them.

The board at present, whilst holding rigorous – and sometimes passionate – debates, operates confidentially and consensually. Yale wants it to continue that way.

What are his best options for managing this situation for a good outcome?

I do not believe that there is a single correct solution. Without knowing a lot more, I can only suggest one possible way forward for consideration.

Firstly the Board needs to be clear on what the strategy is and also short and longer term goals. If this is not already clear, some external assistance may be required. A formal assessment of the skills required to deliver the strategy could then identify if the current Board needs to be changed and/or increased.

Any increase to the Board could then be undertaken by the Board appointing a new director/s with the required skills. Such appointment/s would take immediate effect and, at the next shareholder meeting, be subject to shareholder approval. Shareholders would then be faced with a well thought out alternative to the shareholder and his colleagues.

If no change is required, the first step would be to try and convince the shareholder that no change is required. It would seem that the shareholder is unlikely to change his view and an EGM would be required. Prior to the EGM the Board should inform all shareholders about the strategy and goals and how these could be achieved without the appointments as called for by the shareholder. Having a 17% holding is significant but the most important question is; what do the other 83% of shareholders want? I would suggest that it is up to the current Board to demonstrate that the current strategy is sound and thus influence the remaining shareholders. If it can be shown that significant progress is being made towards the set out goals the Board has a good chance that many shareholders will want to give more time to see further progress and not vote in favour of the dissident. It is then up to the Board to deliver or face further resistance at the next AGM.

Lastly, I would suggest the Board give serious consideration to see if perhaps the shareholder is on the right track and if it would be possible to work with him to find a solution that would benefit all/most shareholders. It is not the best interests of the Board but the best interests of the shareholders that must ultimately prevail.

Frank Bethune is Director of Alliance Support Services Pty Ltd. He is based in Perth, Australia.

The company is listed and continuous disclosure applies. Improved performance may be disclosable; especially if market expectations no longer align with reality. Yale should consider if the change is price sensitive and sufficiently definite for disclosure. If so, disclosure must happen ‘immediately’ regardless of other issues.

The strategy was so far off course that investors knew. The board should consider their role in this and any improvements they could make to processes or skills. They should also look to the future and consider the skills that will be required as the strategy unfolds. There will always be additional skills that a board could use. Yale must clarify this board’s next skills targets. He can then review the proposed directors against these:

• If the proposed directors replicate a current director Yale could change the composition of the board and keep the shareholder happy. Alternatively he could talk to the shareholder and see if, between them, they can agree on a different candidate that would add value and not require an ‘ousting’.
• If the proposed directors’ skills are valuable additions Yale could appoint one or both of them to a casual vacancy and ask the shareholder to withdraw his request for a general meeting.
• If the proposed directors’ skills are not required, Yale can talk with his shareholder, in confidence, to see if he would nominate different directors with skills that will be useful.

If there is no way to work with the shareholder towards establishing a board with the right skill set then Yale has no choice and must call a meeting. He will, however, now have some valid arguments to put to the shareholders supporting his preferred board composition.

If those arguments are not accepted Yale must work to rebuild the unity of the recomposed board. The board of Telstra after the controversial appointment of Mr Cousins provides a good example.

Julie Garland McLellan is a practising non-executive director and board consultant based in Sydney, Australia.

As Chair of a listed company board, Yale’s primary duty is to act in the best interests of the company which is all shareholders. In an environment where an individual shareholder can effectively nominate a director, the role of the Nominations Committee is vital and, as committee Chair, Yale is charged with ensuring that the shareholders are fully informed to make a decision as to the composition of the Board.

The Nominations Committee can, and should, provide information to shareholders in the meeting notices to assist with their decision-making as to whether to elect the additional directors. Yale’s dilemma is to determine how much influence the Committee should have on the shareholders’ decision-making. He could persuade the Committee to “bias” the presentation of information to dissuade shareholders from electing the proposed directors, or even to not recommend that they make a change to the Board structure. Alternatively he could present impartial information with no recommendation to shareholders. Given the Board’s confidence in the current structure and strategy, he would be unlikely to face much opposition from other Committee members to try to influence shareholders to maintain the status quo.

In determining whether to take action to influence shareholders to not elect the proposed directors, Yale should consider:

• Board independence – would the new directors be considered independent, given their association with the investor who holds a substantial interest?
• Board diversity – these directors are likely to challenge the status quo with regard to strategy and may challenge the position of the CEO. While this could be viewed as a distraction, it could add value to the Board by increasing diversity of thought, which should be a key requirement for new directors.
• Future Board structure – appointing 2 more directors will mean that the existing Board may no longer have the ability to appoint specific expertise, manage succession or increase remuneration.
• Continuous disclosure – if the notice of meeting discloses details of the company’s progress and improved performance, then this could amount to disclosing information not in the public domain and therefore continuous disclosure obligations need to be considered.
• Potential future instability – if the investor does not “get his own way” will he continue to try and change the structure of the Board and strategy of the company to the detriment of other shareholders?

Jane Meade is a Partner – National Technical – at RSM. She is based in Sydney, Australia.

Book review - Dilemmas, Dilemmas II Contributions from international governance experts, including directors, advisers, consultants, and academics provide insights that extend and enhance the ability of the reader to respond to situations that arise in boardrooms. Directorship is about judgement and this book provides a range of responses from which readers can rapidly assess and enhance their own responses to more effectively meet the challenges of their own board roles. These case studies are drawn from real life. They are up-to-date, entertaining and educational. They will make you a better director! With examples of commercial, family, not-for-profit and government sector boards this book is an authoritative and comprehensive source of inspiration for experienced and aspiring directors. If you wish to purchase multiple copies please email Julie and she will arrange a bulk discount for you. Available at Amazon.com

Inspirational quote for November - This month my favourite quote is:

“the race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all.”

~ Ecclesiastes, 9:11 ~

Yale has certainly been affected by chance events. He should do his best under the circumstances whilst remembering that doing his best will not necessarily guarantee his preferred outcome. Sometimes boards are very difficult places to be.

October was a very interesting month. I published my most widely read and shared post ever: Enough to Make you Sick. It dealt with the vexed topic of CEO change (I won’t call the events that inspired the article ‘succession’ as there was no element of ‘success’ in them). The AGM season is in full swing and keeping boards busy. I’m hoping that once the AGMs are concluded thoughts will turn to strategy retreats, risk workshops and board performance reviews; all of which I would be delighted to help you with. I hope you are happily busy and look forward to hearing from you should you have a need for my services in board facilitation, performance review, recruitment or education.

A note on names - A few readers have asked me where I find the names for the protagonists in each case study. I can only say that I ‘steal’ them from people I meet or things that I read. Yale is an uncommon name of Welsh origin. It means ‘upland, heights or moor’. Our protagonist this month will need to seize the high ground if he is to lead his board and company successfully through the current situation.

This newsletter - If you have any ideas for improving the newsletter please let me know. If you are reading a forwarded copy please visit my website and sign up for your own subscription.

Suggestions for dilemmas - Thank you to all the readers who have suggested dilemmas. I will answer them all eventually.

Farewell until the next issue (due 1 December 2015). I look forward to greeting you again then.

Enjoy governing your corporations; we are privileged to do what we do!

Best regards,
Julie

 

The opinions expressed above are general in nature and are designed to help you to develop your judgement as a director. They are not a definitive legal ruling. Names and some circumstances in the case study have been changed to ensure anonymity. Contributors to this newsletter comment in the context of their own jurisdiction; readers should check their local laws and regulations as they may be very different.